Addressing the latest hot-button issue in the nations housing crisis, Bank of America chief executive Brian Moynihan on Tuesday pledged to resist investors who want banks to buy back potentially defective mortgage loans.
In recent weeks, alleged mishandling of foreclosure paperwork has dominated headlines, but a potentially more expensive problem is the putting back of loans made by banks and sold off to investors during the housing boom. As these loans sour, investors want banks to buy them back at a loss for the banks.
The repurchase of these loans has become an increasingly worrisome issue for investors in recent weeks, rattling bank stocks. Industry losses could range from $55 billion to $120 billion, according to one estimate last week.
In an interview Tuesday, Bank of America chief financial officer Chuck Noski said the mortgage buybacks will be the more important financial issue and said it could take two or three years to play out and will cause substantial additional expense for the bank.
The latest mortgage-related woes are another blow to the financial industry and struggling borrowers. Theyre also a threat to a sputtering economy and a wobbly housing market.
We continue to bounce along the bottom, said Karen Gibler, associate professor of real estate at Georgia States Robinson College of Business. The market cant seem to gain any traction. As soon as we work through one problem, there is something else.
Questions about mortgage-related issues surfaced Tuesday as Bank of America reported a third-quarter loss of $7.6 billion, driven by an accounting charge tied to new financial reform legislation. Wells Fargo reports earnings today.
Bank of America shares declined 4.4 percent to $11.80 after Bloomberg News reported that Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York wrote a letter to Bank of America seeking to force the lender to repurchase soured mortgages packaged into $47 billion of bonds. The letter also went to Bank of New York Mellon Corp., the debts trustee, according to people familiar with the matter.
We continue to review and assess the letter, and have a number of questions about its content, including whether these investors have standing to bring these claims, Noski told analysts Tuesday. We continue to believe the servicer is in compliance with the servicing obligations.
On the foreclosure front, Moynihan highlighted progress the bank is making in examining foreclosure-related procedures and documents. Bank of America announced Monday that it was taking steps to resume foreclosure sales in 23 states, while continuing to review its handling of actions in the rest of the country, including North Carolina. Many banks have stalled foreclosure actions amid allegations that documents have been mishandled or not properly reviewed.
While stressing the bank does all it can to help struggling borrowers stay in their homes, Moynihan told analysts we have to get through this difficult work of foreclosures to allow the market to heal.
Noski added in the interview: Homes need to be sold to people who can afford them and live in them.
Moynihan said it will take three to five weeks to resubmit more than 100,000 amended affidavits in the 23 so-called judicial states, including South Carolina, where judges sign off on foreclosures. The bank said the assessment in the remaining states is expected to be completed in the next few weeks.
The review involves assessing all foreclosure procedures, an independent review of completed affidavits and interviews with employees involved with the process. The ongoing assessment has found past foreclosure decisions to be accurate, he said. A bank spokesman declined to identify the outside firms conducting the review.
Though Bank of America is trying to move beyond the controversy, attorneys general throughout the country are probing lenders practices, lawmakers have called for congressional hearings and lawyers are working on lawsuits.
Asked to characterize the significance of the foreclosure flap to banks, Moynihan said it involved technical issues that werent a big deal for mortgage servicers, while acknowledging it was a big issue for people who live in the homes.
The bank emphasized its efforts to keep homeowners in their homes including the completion of 700,000 permanent loan modifications since January 2008 while noting that borrowers who end up in foreclosure are significantly behind on their payments, an average of a year and a half.
Of foreclosure sales in the third quarter, 80 percent of borrowers had not made a payment for more than a year. Half of the borrowers were unemployed or had their income reduced. More than 30 percent of the properties were vacant.
Noski said that the banks decision to resume foreclosures in the 23 states didnt necessarily signal that the underlying foreclosure paperwork was immaculate. But it did mean, he said, that no one had erroneously been foreclosed on.
Were finding that weve acted responsibly but we have more work to do to satisfy people, he said. Its an emotional, difficult, unfortunate personal experience and we respect that.
Bank of America, however, was criticized by community groups and the Service Employees International Union for restarting the foreclosure process. The company hasnt spent enough time on its review, the groups said.
Ohio Attorney General Richard Cordray said the bank may have mishandled tens of thousands of cases. They tell us that they have fixed the problem in a matter of weeks, Cordray said in a statement. Were certainly not going to take their word for it.
The mortgage putback issue is the latest fallout from the housing crisis fueled by lax lending in the last decade.
Banks pumped out loans to borrowers and then packaged them into bonds for investors eager for outsized returns. The investors included government-backed mortgage giants such as Freddie Mac and Fannie Mae, as well as pension and hedge funds. The investors are now asking banks to buy back loans they deem defective because of allegedly poor underwriting standards or other problems.
As he did in the banks second-quarter earnings conference call, Moynihan stressed that a claim by an investor doesnt necessarily mean the bank has to pay. While the bank would like to put the issue behind it, he said the right thing to do is to fight such claims where warranted.
If you think about people who come back and say, I bought a Chevy Vega but I want it to be a Mercedes, were not putting up with that, Moynihan said. And we will be very ardent to protect the shareholders interests.
At the end of the third quarter, Bank of America said it had $12.9 billion in outstanding claims from investors, up from $11.2 billion in the previous three-month period. The bank set aside $872 million to cover these claims in the third quarter, down from $1.2 billion in the previous quarter. Overall, it has set aside total reserves of $4.4 billion.
Heres how one segment of loans has played out: Bank of America said it sold $1.2 trillion in loans to government-sponsored entities such as Freddie Mac and Fannie Mae from 2004 to 2008. So far, its received $18 billion of repurchase claims on these loans and resolved $11.4 billion of those claims, resulting in losses of about $2.5 billion, or 22 percent.
The bank, which became a major mortgage lender and servicer after buying Countrywide Financial in 2008, estimated that it has already received more than two-thirds of the claims expected on Freddie Mac and Fannie Mae loans made between 2004 and 2008. Bank of America also faces claims from other investors, some of whom are suing the bank. Those potential losses are more difficult to predict, Noski said.
Noski said that the bank was working to provide investors with a great deal of transparency and new information about how this could affect Bank of America.
On Tuesday, research firm CreditSights estimated that the bank could face remaining repurchase losses of $10 billion to $11 billion, which would be equal to about $4.6 billion taking into account reserves and taxes. Although a large and very rough figure, we continue to view this as a manageable problem in the context of the entire BofA franchise and earnings potential, CreditSights said.
In another report Tuesday, Sandler ONeill + Partners analyst Jeff Harte called the banks mortgage-related disclosures a modest positive, citing the banks contention that past foreclosures were accurate and the size of the banks reserves for mortgage repurchases. We continue to believe that (mortgage repurchase) exposure fears are overblown but note that the actual level of future repurchase remains both a key determinant and an unknown, Harte wrote.